My friend Diane Kennedy posted on Facebook this morning an interesting observation.
“Normally, American citizens are taxed on worldwide income. But if you’re out of the country for 330 of a one year period, you get a big exemption – $95,200 – that is not subject to tax plus you get to write off your rent and other expenses.”
The original premise of this was, that you would be paying taxes to the country the money was earned in. However the foreign income exclusion is on top of, and in addition to, the foreign tax credit. That means you can exclude income and some living expense plus get a credit for the taxes paid to the foreign country and the credit will carry forward if it is not completely used that year.
There is one problem, you can’t move to just any country and have this apply. It has to be a country we have a treaty with and it is not under an embargo. That means that moving to Cuba would make your income completely taxable. Working in Afghanistan however would allow you to take the exclusion, unless you are in the military and stationed there. For some reason being a contractor instead of active duty military makes a difference. Being at a military base (even if you are not actually on the base most of the time) means that your income is considered as being earned in the US if you are active duty military. If you are a contractor however (even if all your activity is on a US military base and you are already paid more than the military) you can use the foreign tax exclusion.
Instead of congress trying to raise taxes why not just get rid of some of these outrageous regulations? The foreign tax credit alone, would allow people to not be taxed twice on their income earned overseas. Eliminating just this one exclusion could allow Congress to actually have a balanced budget. But then again, it would be more likely for me to pack up my family and move into a foreign country within the next fifteen minutes than for Congress to do something that actually makes sense.